How to Set Up an ICHRA: Eligibility, Contributions, and Notices

To set up an Individual Coverage Health Reimbursement Arrangement (ICHRA), an employer defines which classes of employees will be eligible, chooses monthly allowance amounts, drafts a written plan document, sends a 90-day advance notice to eligible workers, collects coverage attestations, and then reimburses qualified premiums and medical expenses on a tax-free basis. Federal rules finalized in June 2019 created this benefit, which lets a business of any size reimburse workers for individual health insurance instead of offering a traditional group plan.¹ The work is more administrative than complex, but every step carries a compliance requirement.

Step 1: Decide Which Employees Are Eligible

Before setting any dollar amounts, decide which groups of workers will be offered the ICHRA. Federal regulations allow up to eleven distinct employee classes:

Full-time employees (generally 30 or more hours per week)
Part-time employees
Salaried employees
Hourly employees
Seasonal employees
Employees covered by a collective bargaining agreement
Employees still in a waiting period (first 90 days)
Temporary employees of staffing firms
Employees working abroad
Employees grouped by geographic rating area
Any combination of two or more of the above

You can offer the ICHRA to some classes and a traditional group plan to others, but doing so in the same geographic area triggers minimum class size rules: 10 employees for companies with fewer than 100 workers, 10 percent of headcount for companies with 100 to 200 workers, and 20 employees for larger firms.² If every worker in the company gets the ICHRA, the minimum size rules don’t apply.

Within each class, the offer has to be uniform. You cannot give one full-time employee $400 a month and another $600 unless the difference is based on age or on the number of covered dependents.³

Step 2: Set the Monthly Contribution

There is no federal minimum or maximum. You could offer $200 a month or $2,000 a month.³ That flexibility is one of the biggest advantages of the ICHRA structure.

Age-based variation within a class is permitted, but the allowance for the oldest participant cannot exceed three times the allowance for the youngest. This 3-to-1 ratio mirrors the ACA’s individual-market age bands.³ If a 25-year-old gets $300 a month, a 64-year-old in the same class can receive up to $900.

Most employers benchmark against the lowest-cost silver marketplace plan in each region where employees live. That figure tells you whether your allowance is actually useful to workers, and it feeds directly into the affordability calculation in the next step.

Step 3: Check Affordability If You Have 50 or More Full-Time Employees

Businesses with 50 or more full-time employees (including full-time equivalents) are Applicable Large Employers under the ACA.⁴ If that’s you, the ICHRA has to pass an affordability test. For 2026, coverage is affordable if the employee’s remaining cost for the lowest-cost self-only silver plan in their area — after subtracting your ICHRA allowance — does not exceed 9.96 percent of household income.

In practice: if the cheapest silver plan costs $500 a month and you offer $350 through the ICHRA, the employee owes $150 a month, or $1,800 a year. For a worker earning $30,000, that’s 6 percent of income, which clears the threshold.

Failing the test does not void the ICHRA, but it opens the door to penalties. Under Section 4980H(b), the employer owes $5,010 per year for each full-time employee who declines the unaffordable offer and gets a premium tax credit through the marketplace.⁵ A separate penalty under Section 4980H(a) can reach $3,340 per full-time employee if the employer fails to offer coverage to at least 95 percent of its full-time workforce.⁶ Employers under the 50-employee threshold are not subject to either penalty.

Step 4: Draft the Plan Document and Summary Plan Description

Every ICHRA has to be established through a formal written plan document. ERISA requires all employer-sponsored welfare benefit plans to operate under a written instrument. The plan document spells out which classes are eligible, the monthly allowance for each class, the plan year, rules for mid-year changes, and the procedures for amending or terminating the arrangement.

Alongside it, you prepare a Summary Plan Description, which is a shorter, readable version of the same rules written for participants. Both documents should be finalized before the notice goes out in the next step.

Step 5: Send the 90-Day Notice

You must provide a written notice to every eligible employee at least 90 days before the start of the plan year.⁷ For a January 1 start, that notice goes out no later than early October. It has to include the monthly allowance, the coverage start date, and a clear explanation that accepting the ICHRA generally means giving up eligibility for the premium tax credit on the marketplace. The Department of Labor publishes a model notice template that satisfies the requirements.

New hires create a timing wrinkle. If someone joins mid-year and cannot receive 90 days of advance notice, the notice must go out as soon as practicable, and that employee gets a 60-day special enrollment period to find individual coverage.⁷ Keep a log of when you sent each notice and to whom. If the Department of Labor audits your plan, delivery dates are the first thing they check.

Step 6: Collect Coverage Attestations Before Reimbursing

After receiving the notice, employees shop for coverage. The ICHRA offer triggers a 60-day special enrollment period on the marketplace, but employees can also buy off-marketplace or through a broker. The only requirement is that the plan qualifies as individual health insurance coverage, which includes marketplace plans, off-marketplace major medical plans, and Medicare.

Before you pay out a single dollar, the employee has to submit an attestation confirming active coverage. Federal rules require two layers of substantiation: an annual attestation at the start of the plan year (or when coverage begins) confirming enrollment for the employee and any covered dependents, and an ongoing attestation with each reimbursement request confirming coverage was in place during the month the expense was incurred.⁸ The DOL provides model attestation forms for both. Skipping this step is the fastest way to lose the tax-advantaged status of the arrangement.

Step 7: Run the Reimbursement Workflow

Once the plan is live and attestations are on file, employees begin submitting claims. The typical flow: the employee uploads proof of a premium payment or other qualified medical expense to a digital portal or a third-party administrator, the administrator verifies the expense matches the plan terms and confirms the attestation is current, and the reimbursement gets processed.

These reimbursements are excluded from the employee’s gross income and are not subject to federal income tax or FICA. For the employer, they’re deductible as ordinary business expenses.⁹ That dual tax advantage only holds if the substantiation trail is clean. If an auditor cannot match a reimbursement to a verified expense and a valid attestation, the payment gets reclassified as taxable income.

Most employers use a third-party administrator to handle claims processing, attestation tracking, and compliance documentation. Monthly per-employee fees typically range from roughly $15 to $45 depending on the provider and service level, with some charging a one-time setup fee.

A Design Choice: HSA Compatibility

Employees who want to contribute to a Health Savings Account run into a restriction. A standard ICHRA that reimburses premiums and all qualified medical expenses before the deductible is met disqualifies the employee from HSA contributions, because the IRS treats that as first-dollar coverage.¹⁰

The workaround is a post-deductible ICHRA that only reimburses medical expenses after the employee meets their annual deductible. Under this structure, the employee can stay in a qualifying high-deductible plan and contribute up to the 2026 HSA limits of $4,400 for self-only coverage or $8,750 for family coverage.¹¹ The plan document has to explicitly reflect the post-deductible design. An employer can also offer both versions within the same class, letting employees choose the standard or the HSA-compatible version.¹⁰

Ongoing Compliance Obligations

Standing up the plan is only the front end. Several requirements continue year after year.

PCORI Fee

Because an ICHRA is a self-insured health plan, the employer owes an annual Patient-Centered Outcomes Research Institute fee. For plan years ending between October 1, 2025, and September 30, 2026, the fee is $3.84 per covered life.¹² It gets reported on the second-quarter Form 720 and is due by July 31 of the year after the plan year ends.¹³ For a calendar-year plan ending December 31, 2025, the payment is due July 31, 2026.

Year-End Tax Reporting

Applicable Large Employers report the ICHRA offer on Form 1095-C using indicator codes 1L through 1S, which identify the type of ICHRA and the affordability safe harbor used. Line 15 reports the employee’s required contribution, which is the remaining cost of the lowest-cost silver plan after subtracting the ICHRA allowance.¹⁴ Smaller employers that are not ALEs report coverage on Form 1095-B.

COBRA

An ICHRA is a self-insured group health plan, so federal COBRA rules apply to employers with 20 or more employees. When a qualifying event occurs, the departing employee must be offered the option to continue the ICHRA for up to 18 months, or longer in cases of disability or a second qualifying event.¹⁵ The COBRA premium equals the monthly ICHRA allowance plus a 2 percent administrative fee.

Record Retention

ERISA Section 107 requires plan sponsors to retain records sufficient to verify filed reports for at least six years from the filing date.¹⁶ Most benefits advisors recommend seven years for ICHRA plan documents, attestation forms, reimbursement records, and notice delivery logs. Keep a separate file for each participant with their signed attestations, submitted claims, and proof of coverage. If a reimbursement is later challenged, the burden falls on the employer to prove the expense was substantiated and the participant had qualifying coverage at the time.

1
Internal Revenue Service. Health Reimbursement Arrangements (HRAs)
2
Federal Register. Health Reimbursement Arrangements and Other Account-Based Group Health Plans
3
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements (HRAs)
4
Internal Revenue Service. Employer Shared Responsibility Provisions
5
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
6
Internal Revenue Service. Revenue Procedure 2025-26
7
Department of Labor. Individual Coverage HRA Model Notice
8
Department of Labor. Individual Coverage HRA Model Attestations
9
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
10
Internal Revenue Service. Health Savings Accounts and Other Tax-Favored Health Plans
11
Internal Revenue Service. IRS Notice 2026-05
12
Internal Revenue Service. Patient Centered Outcomes Research Trust Fund Fee Questions and Answers
13
Internal Revenue Service. Patient-Centered Outcomes Research Institute Fee
14
Internal Revenue Service. Instructions for Forms 1094-C and 1095-C
15
Centers for Medicare & Medicaid Services. COBRA Continuation Coverage
16
Department of Labor. Recordkeeping in the Electronic Age